<PAGE>   1
                                    FORM 1O-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington D.C., 20549

                                   FORM 1O-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                    For the Fiscal Year Ended April 30, 1997

                           Commission File No. 2-31909

                       SYNTHETIC BLOOD INTERNATIONAL, INC.


New Jersey                                        22-3067701
----------------------------------------------------------------------------
(State of Incorporation)                          (IRS Employer I.D. Number)

        402 West Broadway Street, Suite 400, San Diego, California, 92101
        -----------------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number and area code: (619) 595-4829

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

(1)              YES (X) NO

(2)              YES (X) NO

        Indicate by check mark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be continued,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.


                 YES (X)  NO

        The aggregate market value of the shares held by non-affiliates of the
registrant (assuming officers, directors and 10% shareholders are affiliates)
was approximately $ 5,564,872 based on the closing bid price of the Registrants
Common Stock on April 30, 1997 of $0.15 per share.



                                        1

<PAGE>   2
                                     PART 1

Item 1 - BUSINESS

        Synthetic Blood International, Inc. ("SBI" or the "Company") is a
development-stage company which is developing OXYCYTE, a proprietary synthetic
blood emulsion and FLUOROVENT, a neat liquid for assisting oxygen exchange in
damaged or diseased lungs for human and non-human applications based upon
perfluorocarbon ("PFC") technology. In addition the Company has developed an
Implantable continuous reading glucose biosensor. The Company is now in the
Preclinical stage and is completing independent animal testing necessary for the
preparation of applications with the United States Food and Drug Administration
("FDA") for approval to market these products. After the submission to the FDA,
the Company's products will require extensive clinical testing before FDA
approval may be granted. No assurance may be given that FDA approval will be
granted.

        SBI's scientific team is led by Dr. Leland C. Clark, Jr. who is a
pioneer and leader with a world-wide reputation in the development of PFC-based
synthetic blood. Dr. Clark invented the first heart-lung machine which
successfully provided oxygen to the blood stream of, or perfused, a human being.
The treatment of this patient showed the feasibility of using an artificial
heart and lung to sustain life. Dr. Clark also invented the Clark Electrode,
which is utilized worldwide to measure oxygen in the blood and for many other
commercial oxygen measuring needs in industry. Dr. Clark has also experimented
with fluorocarbon liquid breathing which was the catalyst for the development of
fluorocarbon based synthetic blood substitutes.

        The Company began conducting business in its current form in September
1990, shortly thereafter changed its name to Synthetic Blood International,
Inc., and revised its business purpose to developing a line of red blood cell
substitutes. During this period part of the current management team began as
officers and directors


MARKET

        According to independent industry sources which the Company believes are
reliable, the total future market potential for synthetic blood worldwide is now
estimated to be $10-$15 billion. The United States market is estimated by the
Company to account for up to 35% of this total. The Company believes the growth
potential for the synthetic blood market is substantial, although there can be
no assurance as to when, if ever, any applications for such blood substitutes
will be approved by the FDA and introduced into the market, and if so, whether
any particular market size will be achieved.

        If appropriate regulatory approvals are obtained, several major
applications for synthetic blood are generally envisioned and are being
developed by many companies. The sole existing application for synthetic blood
approved by the FDA for commercial use is balloon angioplasty, for which
Fluorosol-DA (20%), a PFC-based blood substitute, has been approved. Industry
sources indicate that the largest number of recipients of synthetic blood would
be patients involved in various surgeries, and would represent approximately 54%
of the total demand. Other major applications for synthetic blood are for
procedures related to thrombolytics (anti-blood clotting), cancer, traumas,
sickle cell anemia and organ transplantation. Each application would require a
particular type of PFC emulsion as treatment, as the properties of PFC's can
vary significantly, depending on their molecular weight, boiling point and
physical structure. Although one perfluorocarbon could eventually be used in all
applications, the Company believes it may be advantageous to have emulsions of
different perfluorocarbons available.

        Approximately 600,000 adult inpatients receive treatment with a
mechanical respirator annually in the U.S. This together with 80,000 neonates
born each year with severe respiratory disorders suggests a potential market for
FLUOROVENT(TM) in the range of $500 millions for hospital inpatients alone.


                                        2

<PAGE>   3
        The Company believes the potential market for an Implantable
self-fueling glucose sensor was significantly increased by the announcement at
the June 1993 annual meeting of the American Diabetes Association that,
"Complications of the disease (diabetes) could be prevented or delayed ... when
diabetics closely monitored their blood sugar levels with a special meter
throughout the day and injected themselves with insulin four to seven times
daily to keep their blood sugar at near-normal level". The total potential
market is now estimated to exceed $1 billion annually.

        Most diabetics do not mind injecting insulin when needed but to finger
stick themselves many times throughout the day and night to determine, if or how
much insulin is needed, becomes a very difficult regimen to continue day after
day. Of the 14 million diabetics nationwide, tens of thousands experience
complications that include vision and nerve loss, or kidney failure and
researchers have said that most may lengthen their lives and lessen symptoms
while at the same time reducing the nation's health care costs.

TECHNOLOGY

        PFC's consist principally of carbon and fluorine atoms. Fluorine is,
under normal conditions, a gas, obtainable from the widely available mineral
fluorite (calcium fluoride). The PFC's are chemically inert, causing no
chemical reactions when in contact with other substances, are biologically inert
and have no effect on healthy organ function when given in clinical doses.

        Earlier studies had shown that oxygen and carbon dioxide, gases which
are essential to mammal breathing, are highly soluble in certain fluorocarbon
liquids. This fact suggested that such liquids could support respiration in
mammals. Beginning in 1965, Dr. Clark demonstrated in a series of laboratory
tests that mice could survive, and breathe, while they were immersed in a PFC
liquid. Dr. Clark's experiments also indicated that PFC's could perform the same
basic functions as red blood cells, i.e., as life-supporting, intravascular
oxygen and carbon dioxide transport agents. In fact, the Company believes PFC's
can exceed the performance of red blood cells in certain functions.

        Since the mid 1960's, one aspect of research and development efforts has
been to determine which PFC's are safest for intravascular use in humans. In
this regard, the molecular weight and structure of PFC'S, which affect the rate
at which they are expelled from the body, have been of key importance.

        PFC'S leave the body by evaporation, mainly through the lungs. Depending
on the molecular structure and boiling point of a given PFC, the process of
evaporation can be as short as a few days, or as long as 100 years. This process
determines the length of time that the PFC's stay in certain organs of the body
such as the spleen and liver (referred to as "dwell time"). Generally, the
heavier the PFC molecule, (i.e., the more carbon and fluorine atoms it
contains), the longer the dwell time.

        Certain PFC molecular structures are known by the Company to cause
undesirable side effects in laboratory test animals, which are believed to be
related to how quickly PFC's leave the body. Some types of PFC'S with a very
short body dwell time, when administered intravascularly, have been shown to
cause an enlargement of the lungs in laboratory test animals. Other types of
PFC'S, with very long dwell times, have been found to not cause any significant
side effects. Based on the Company's review of FDA approval procedures for
PFC'S, the Company has concluded that the FDA apparently considers PFC'S with
very long body dwell time as generally unacceptable. A therapeutic agent such as
PFC's may be perceived as better when it is eliminated quickly from the body
after performing its intended function.


                                        3

<PAGE>   4
POTENTIAL APPLICATIONS FOR THE COMPANY'S PRODUCTS UNDER DEVELOPMENT

        Several major applications are currently under review by the Company for
its PFC-based synthetic blood products under development. The most important
initial applications are in cardiac catheterization and other surgical
procedures. Such applications include the uses such as for percutaneous
transluminal coronary angioplasty with a balloon-tipped catheter, treatment of
myocardial infarction (heart attack) and cardioplegia for open heart surgery.
Other potential applications are as a cancer diagnostic and adjunct therapeutic.
Additional possible applications exist for procedures related to thrombolytics
(anti-blood clotting), traumas, sickle cell anemia and organ transplantation.

        The products under development could be used to enhance radiation
treatment and chemotherapy. Because malignant tumors or cancers contain less
oxygen than normal tissue and the Company's products carry more oxygen than red
cells, the use of PFC'S could result in a much higher presence of oxygen at the
tumor site. Consequently lower effective doses of chemotherapeutics or radiation
may be used in the treatment of certain cancers in conjunction with the
Company's products under development.

        The Company's products are expected to carry as much oxygen as red blood
cells but because they carry oxygen at high oxygen tensions they can exchange a
greater amount of oxygen. Unlike hemoglobin and human blood, PFC'S do not
require blood-typing or cross matching and they do not transmit disease. During
cardioplegia (surgical arrest of the heart for open heart surgery), studies have
been performed using PFC'S in place of whole blood or the plasma expanders such
as saline or dextran, which demonstrated that the oxygen transport
characteristics were superior to those of the expanders. PFC'S can also be used
to prime the heart-lung machines, eliminating the reliance on scarce and
potentially dangerous human blood.


MARKETING

        The Company intends to search for strategic partners in Europe, the Far
East or elsewhere for the purposes of completing development of its products,
manufacturing, testing and marketing its products under development for
distribution in these areas. To date no agreements have been completed although
a number of negotiations are in progress. There can be no assurance that any
such agreement will be consummated.

        The Company plans on initially contracting for the manufacturing of its
products in the United States for the purpose of supplying sufficient quantity
for the proposed clinical testing. The company then has the option to license
out on a royalty basis all or part of its manufacturing and distribution or
establish an organization for the distribution and sale of its products in North
and South America. These sales are anticipated to be made either through a sales
force selling to drug or medical distribution systems or direct sales to end
users such as hospitals and other institutions by future company sales force.

        The marketing of the biosensor devices if FDA approval is achieved will
probably be by manufacturing and distribution via licensing agreements with
companies presently involved with distributing products in the diabetic field.
Several of such companies have been contacted and are at present reviewing the
patents and discussing the technology with our Company.



                                        4

<PAGE>   5
   COMPETITION

        Synthetic blood research to date has been focused virtually exclusively
on red cell substitutes. PFC-based hemoglobin substitute, bovine hemoglobin,
modified human hemoglobin and recombinant (genetically engineered) human
hemoglobin are the four main categories of red cell substitutes currently being
pursued.

        PFC'S are based on elements and minerals which occur naturally and are
in abundant supply. PFC'S must be emulsified with a surfactant and mixed with
"salt" water, before it can be administered intravenously.

        Bovine hemoglobin is derived from cows, blood. It is not compatible with
human blood and, therefore, requires substantial processing in order to become
usable. Various proteins present in bovine blood must be eliminated lest they
cause an immune response in humans.

        Modified human hemoglobin is based on reconstituted, old or otherwise
discarded human blood. Although it is derived from human blood, modified human
hemoglobin can only be used after it has undergone substantial processing.

        Recombinant human hemoglobin has been produced in yeast and in swine.
Current efforts are underway to engineer genes which will allow sufficient
quantities of oxygen to be released for the oxygenation of tissues. Organ
toxicity remains a problem to be solved.

        One other company is involved with the development of a PFC based liquid
ventilation method utilizing a mechanical ventilator to move the PFC in and out
of the lung. It is currently in Phase I/II Clinical testing.

        There are a number of companies and researchers attempting to develop an
Implantable glucose sensor or other approaches which include the use of infrared
light rays, drawing glucose through the skin surface and other noninvasive
mechanical devices. None of these methods have been successful in spite of the
renewed emphasis on the development of such a sensor. There are over 125 public
and closely held companies involved worldwide in the development of synthetic
blood and related products.

MANUFACTURING AND SOURCES OF SUPPLY

        PFC'S, traditionally manufactured as lubricants for military and
industrial use, are available from a large number of sources. However, the
degree of purity ultimately required by the FDA for the use of PFC'S for medical
purposes could limit the sources for raw materials. Surfactants are also
generally available, although quality varies. between different manufacturers.
Certain types of egg yolk phospholipids are superior to others. Saline or Ringer
Is solution is available from multiple sources and is relatively standard in
quality.

PATENTS AND PROPRIETARY RIGHTS

        OXYCYTE(TM) is based on the molecular structure of certain PFC'S, that
provides equal or greater oxygen carrying capacity, greater ability to be stored
at room temperature, greater dwell-time in the blood stream but less dwell time
in the liver and spleen, and fewer side-effects than many of the synthetic blood
products of its competitors.

                                        5

<PAGE>   6
        Patent application No. 08-242-310, filed May 13, 1994 is for "A Method
of Assisting Normal Breathing in a Mammal Having a Lung Disorder". It utilizes
one of the PFC'S being developed for a synthetic blood emulsion for therapeutic
treatment of certain lung disorders. It contains 13 claims which have been
approved by the patent examiner and is scheduled for issuance by October
1997.Foreign application filed in December 1996 in Canada, Australia, Japan and
in the European Communities.

        A Continuation-in-Part was filed May 12, 1995 for 14 additional claims
of the above by mixing two or more PFC compounds to achieve different exhalation
rates, or dwell time. Additional patent applications are in the process of being
prepared by the Company for composition of matter, method of purification, and
new improved emulsion formula.

        A "Glucose Sensor" patent application was filed in December 1996 for a
method of restricting the flow of glucose through the outer filter membrane and
the ability to store oxygen in the sensor. This enables the implanted sensor to
operate in the low oxygen and high glucose levels found in body tissues. This
application contains 32 claims.

        An "Implantable Sensor Employing an Auxillary Electrode" patent
application was filed in January 1997 containing 20 claims covering the design
of the titanium case as a reference electrode. This alleviates the need to force
the reference electrode to carry the current allowing the reference electrode to
remain constant and stable, improving the accuracy of the glucose measurement.

        Additional patent applications are in the process of preparation and
will be filed soon for "A Copolymer Screen Membrane with Enhanced Oxygen
Transport for Use in an Implanted Biosensor"and "A Method of Correcting the
Temperature Coefficient of the Glucose Probe Output Signal".

        Pursuant to Dr. Clark's Employment Agreement, all of his intellectual
property not already assigned to third parties were assigned to the Company.


        GOVERNMENT REGULATION

        All of the Company's proposed products will require governmental
approval before production and marketing can commence. The regulatory approval
process is administered by the FDA in the United States, and by similar agencies
in foreign countries. FDA review of new drugs, devices or biologicals is an
uncertain, costly and lengthy process. Various state, federal and foreign
statutes also govern or influence the manufacturing, safety, labeling, storage,
record keeping and marketing of such products. ongoing compliance with these
requirements can require the expenditure of substantial resources.

        At the present time, the Company intends to file a "Request for
Jurisdiction" with the FDA for its OXYCYTE(TM) artificial blood product and
FLUOROVENT(TM) for its liquid ventilation product. The FDA's response to these
requests will likely determine whether a subsequent filing by the Company for
that product will be classified as a drug, device or biological. The Implantable
glucose sensor will be filed as a device and many of its parts are off-the-shelf
material already approved for human implantation by the FDA. The FDA has
different procedures for drugs, devices and biologicals.



                                        6

<PAGE>   7
        Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of marketing of the product in such countries. The requirement
governing the conduct of clinical trials and product approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are some procedures for
unified filings for certain European countries, in general, each country has its
own procedures and requirements.

        EMPLOYEES

        On April 30, 1997, the Company employed 9 individuals, three of whom
were executive and scientific personnel with Ph.D's, three are executives, three
are technicians. None of its employees are currently represented by a union or
any other form of collective bargaining unit.

ITEM 2 - PROPERTIES

        The Company owns no real property and currently leases on a month to
month basis its administrative offices at 402 West Broadway Street, Suite 400,
San Diego, California 92101. The Company rents laboratories at the Charles F.
Kettering Research Laboratories, Antioch University in Yellow Springs, Ohio.
These facilities originally were provided to Dr. Clark for his teaching services
and partly paid by the National Institutes of Health research grant. The Company
has since negotiated a one year lease with options to renew annually on the
premises and expanded its laboratory, general and administrative space. The
lease was not renewed this year and it is rented on a month to month basis
currently $3,700 per month. In addition the company leases office and workshop
space at the Kettering Research Center in Kettering, Ohio. The current monthly
rent is $1,200 per month.


        ITEM 3 - LEGAL PROCEEDINGS

        A legal action against Wright State University and its officers and
directors to protect the privacy of research records held by them under the
Federal Animal Protection Act was settled satisfactorily in June 1996. Two
addition actions have been filed by former employees alleging unfair treatment
during a temporary layoff in December 1995. A contingent liability of $124,000
has been booked to this years expense, however the Company plans to aggressively
pursue a settlement at a lower cost.


        ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

        None.





                                        7

<PAGE>   8
        ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS

        On February 26, 1993 the Common Stock of the Company began limited
public trading in the over-the-counter market with prices quoted in the "Pink
Sheets" published by the National Quotation Bureau under the symbol SYBD. On
March 15, 1993 the Common Stock of the company began limited public trading on
the OTC Electronic Bulletin Board. From 1973 to February 26, 1993 Management
believes there was no public trading market for any of the registrant's
securities. This past year the bid and ask prices as determined by Company
records were as follows:

<TABLE>
<CAPTION>
                                              1997                         1996
               Quarter          Low           High           Low           High
               <S>             <C>            <C>           <C>            <C>
                lst            $ .25          $.65          $ 1/4          $ 3/4
                2nd              .24           .55           7/16           1.00
                3rd              1/8           .18           1/16            7/8
                4th              1/8           .18           1/16            1/2
</TABLE>

        As of April 30, 1997 the approximate number of holders of the Common
stock of the Company was 930. To the best knowledge of management, the Company
has never paid dividends since the date of its incorporation. The Company does
not expect to declare or pay dividend in the foreseeable future.

ITEM 6 - SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                   April 30,      April 30,       April 30,      April 30,        April 30,
                                     1993           1994            1995           1996             1997
                                  --------------------------------------------------------------------------
<S>                               <C>             <C>            <C>             <C>             <C>
Income                            $       811     $      698     $    35,181     $     5,916     $       914
                                  -----------     ----------     -----------     -----------     -----------

Total Expenses                    $   720,437     $  874,997     $ 1,917,004     $ 2,352,143     $ 1,911,290
                                  -----------     ----------     -----------     -----------     -----------

Net Loss from
Operations                        $   719,626     $  874,299     $ 1,881,823     $ 2,346,227     $ 1,910,376
                                  -----------     ----------     -----------     -----------     -----------

Net Loss per share
based on weighted
Shares outstanding                 17,990,650     21,857,475       26,33,838      28,894,248      36,053,557
                                        $0.04          $0.04          $.0.07           $0.08           $0.05

Total Assets                      $   386,368     $3,075,689     $ 1,179,085     $   393,939     $   318,163

Total Liabilities                 $   261,866     $  490,299     $   117,907     $   974,969     $   600,675

Long Term Debt                              0              0     $    32,736     $    16,573     $         0
</TABLE>



                                       8
<PAGE>   9
ITEM 7 - MANAGEMENTS DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996

        The Company is a development-stage company which is developing products
in the medical field and therefore has no revenue from operations.

        For the fiscal year ended April 30, 1997, other income decreased to $914
from $5,916 for the fiscal year ended April 30, 1996. This decrease was due to
substantially less funds available to earn interest.

        The General and Administrative expenses increased 1.0 % from $1,422,809
in the fiscal year ended April 30, 1996 to $1,437,353 during the fiscal year
ended April 30, 1997.

        The Research and Development expenses decreased from $924,093 for the
fiscal year ended April 30, 1996 to $460,978 during the fiscal year ended April
30, 1997. This decrease was due to a reduction in staffing and outside testing
and raw material costs associated with changing the focus from basic research to
product development with the emphasis on patent application filing.

        The interest expense for the fiscal year ended April 30, 1996 was $5,241
compared to the fiscal year ended April 30, 1997 of $12,959. This increase was
due to additional finance and carrying charges necessitated by the reduced cash
flow.

FISCAL 1996 COMPARED TO FISCAL 1995

        For the fiscal year ended April 30, 1996, other income decreased to
$5,916 from $35,181 for the fiscal year ended April 30, 1995 due to a reduction
of funds available for investment.

        The General and Administrative expenses increased 40% from $1,017,415
for the fiscal year ended April 30, 1995 to $1,422,809 during the fiscal year
ended April 30, 1996. This increase was due primarily to $380,000 charged to
general and administrative expense from the issuance of stock below the then
current market price.

        The Research and Development expenses increased 4% from $896,534 for the
fiscal year ended April 30, 1995 to $924,093 for the fiscal year ended April 30,
1996. This small increase was due to the purchasing of a larger volume of raw
materials for additional testing.

        The interest expense for the fiscal year ended April 30, 1995 was $3,055
compared to $5,241 for the fiscal year ended April 30, 1996 primarily due to the
financing of insurance premiums.

EQUITY AND CAPITAL RESOURCES

        The Company has financed its operations since September 1990, when
current management became involved, through the issuance of debt and equity
securities and loans from stockholders. For the fiscal year ended April 30, 1997
the Company had $71,282 in total current assets and a working capital deficit of
$529,393 compared to $106,124 in total current assets and a working capital
deficit of $868,845 during the

                                        9

<PAGE>   10
fiscal year ended April 30, 1996. The Company raised $600,000 from the sale of
Common Stock, $460,775 from stockholder loans and $607,904 of expenses were paid
with stock during fiscal year ended April 30, 1997.

        The Company is in the pre-clinical trial stage in the development of its
products. These products must undergo further development and testing prior to
submission to the FDA for approval to market its products. This additional
development and testing will require significant additional financing.
Additional funds are needed immediately to continue to operate as a going
concern. Funding in the form of bridge loans and future options are currently
being negotiated. There can be no assurance these proposed funding arrangements
will be successful, or that if they are not the Company will be able to secure
additional capital.

        As a result of the Company's accumulated losses from operations, its
accumulated deficit, and its necessity to obtain additional financing to fund
operations until the necessary regulatory approvals are obtained, if ever, its
continuation as a going concern is dependent on its ability to obtain additional
financing as may be required. These factors, among others, raise doubts about
the Company's ability to continue as a going concern.

        In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Stands No. 123, Accounting for Stock-Based
Compensation, which requires adoption of the disclosure provisions for fiscal
years beginning after December 15, 1995 and adoptions of the recognition and
measurement provisions for non-employee transactions no later than December 15,
1995. The new standard defines a fair value method of accounting for stock
options and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.

        During 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No.
128 requires the Company to disclose a basic and diluted earnings per share
calculation. Basic earnings per share (EPS) excludes common stock equivalents
from the EPS calculation. The Company will adopt the provisions of SFAS No. 128
with the 1998 financial statements. Basic and diluted EPS, as computed under
SFAS No. 128, would not have been materially different from EPS determined in
accordance with APB Opinion No. 15 for the periods presented

        FORWARD LOOKING STATEMENTS

        Certain statements in this annual report include forward looking
statements which involve risks and uncertainties. Potential risks and
uncertainties include, but are not limited to the company's ability to obtain
financing and FDA approval to market their products.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements and supplementary data as required by this item
are set forth in a separate section of this report.

ITEM 9 - CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

        None.


                                       10

<PAGE>   11
        ITEM 10- DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE
REGISTRANT

        The directors, officers and key employees of the Company are as follows:

<TABLE>
<CAPTION>
         Name                             Age         Position
         <S>                              <C>         <C>
         Roger A. Ekbom                   70          Chairman of the Board
                                                      Director

         Gerald D. Schlatter              63          President and Director

         Leland C. Clark, Jr., Ph.D.      78          Vice President, Director
                                                      Research and Develop.
                                                      Director
         Robert J. Larsen                 68          Secretary-Treasurer and
                                                      Director

         Richard E. Hoffmann, Ph.D.       46          Laboratory Director
</TABLE>

DIRECTORS AND EXECUTIVE OFFICERS

        Roger A. Ekbom, Chairman of the Board of Directors, Chief Executive
Officer and Director since 1991, was formerly President and major stockholder of
Cardio Vista Systems, Inc., which was sold in 1994. He was also founder and
Chairman of Tronomed, Inc. which was sold in January 1993. From 1978 to 1988,
Mr. Ekbom was the Vice President of and a major stockholder in Respiratory
Support Products, Inc. and Tronomed International, Inc. Mr. Ekbom was formerly
the General Manager of a division of Becton Dickinson, and of Marion Scientific,
a subsidiary of Marion Laboratories. Mr. Ekbom received his B.S. Degree from the
University of Minnesota in 1960.

        Gerald D. Schlatter, President and Director since 1990, was President of
Delamesa Leasing Co., Irvine, California, prior to joining the Company full time
in August 1994. Prior to joining Delamesa Leasing Co. in 1979, Mr. Schlatter was
a Marketing Manager of American Hospital supply's New Product Division. He has
also held position in marketing the Medical Products Division of Xerox
Corporation. Mr. Schlatter obtained his undergraduate degree from the California
State University, Fresno, in Business Finance and Labor Law in 1962

        Leland C. Clark, Jr., Ph.D., was appointed Vice President, Director of
Research and Development in 1991. Dr. Clark received his Ph.D. in Biochemistry &
Physiology at the University of Rochester School of Medicine in 1944. Dr. Clark
has held several academic appointments including Professor of Biochemistry in
the Department of Surgery in the School of Medicine of the University of Alabama
(1958-1968) and at the University of Cincinnati School of Medicine where he was
Director of the Division of Neurophysiology, and was Research Professor of
Pediatrics at the Children's Hospital Medical center of the University of
Cincinnati Medical School(1968-91).

        Robert J. Larsen, Secretary-Treasurer and Director since 1990, is a
former President and Chief Executive Officer of Bay Hospital Medical Center,
Chula Vista, California. Mr. Larsen has 25 years of experience in the
development and management of hospitals and other related enterprises in



                                       11

<PAGE>   12
California and Oregon. Mr. Larsen received his graduate degree in Hospital
Administration from the University of California, Santa Barbara, and his B.A.
from the University of Washington.

KEY EMPLOYEES

        Richard E. Hoffmann, Ph.D., manages the laboratory activities of the
Company in developing a blood substitute. Dr. Hoffmann is a graduate of the
University of Cincinnati, with a doctorate in Physical Chemistry in 1982. Dr.
Hoffmann worked first as a Research Assistant, then as a Research Scientist,
with Dr. Clark at the Children's Hospital Research Foundation in Cincinnati. Dr.
Hoffmann is currently working as a Research Associate with Dr. Clark at the
Kettering Research Laboratories at Antioch University in Yellow Springs, Ohio.

ITEM  11 - EXECUTIVE COMPENSATION

        The summary compensation table shows the compensation for Roger A.
Ekbom, Chairman and Chief Executive officer, Gerald D. Schlatter, President,
Robert J. Larsen, Chief Financial Officer and Secretary-Treasurer of the Company
and Dr. Leland C. Clark, Vice President. Mr. Ekbom, Dr. Clark, Mr. Schlatter,
and Mr. Larsen have been executive officers for the five years ended April 30,
1997.This information includes the dollar amount of base salaries, bonus awards,
stock options and all other compensation, if any, whether paid or deferred.


<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE
                                                                           Stock Option Incent.  Total
   Name & Position      Year         Salary Bonus   Other Awards   Shares   Payouts     other in $ S    TARS Long Tm.Comp.
<S>                   <C>            <C>            <C>            <C>      <C>         <C>             <C>    <C>
Roger A. Ekbom        1997            $ 43,746            0          0         0             0             0    0
                      1996             100,000            0          0         0             0             0    0
Chairman              1995              34,333            0          0         0             0             0    0
                      1994              13,000            0          0         0             0             0    0
                      1993               6,000            0          0         0             0             0    0



Gerald D. Schlatter
                      1997             $87,000            0          0         0             0             0    0
                      1996              96,000            0          0         0             0             0    0
President             1995              85,500            0          0         0             0             0    0
                      1994              13,000            0          0         0             0             0    0
                      1993               6,000            0          0         0             0             0    0


Leland C. Clark, Jr.
                      1997            $ 96,000            0          0         0             0             0    0
                      1996           $114,0000            0          0         0             0             0
Vice President        1995             114,000            0          0         0             0             0    0
                      1994              96,000            0          0         0             0             0    0
                      1993              84,000            0          0         0             0             0    0
</TABLE>



                                       12

<PAGE>   13
<TABLE>
<S>                   <C>            <C>            <C>            <C>      <C>         <C>             <C>    <C>
Robert J. Larsen      1997           $ 62,502            0          0         0             0             0    0
                      1996            100,000            0          0         0             0             0    0
Chief Financial       1995             72,333       35,000          0         0             0             0    0
Officer               1994             55,000            0          0         0             0             0    0
                      1993             48,000            0          0         0             0             0    0
</TABLE>

Stork Option Plan

        The Company's 1995 Stock Option Plan ("Plan") was adopted by the Board
of Directors in April 1995. Pursuant to the Plan, the Company may grant both
incentive stock options intended to qualify for preferential tax treatment under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
nonstatutory stock options that do not qualify for such treatment. Incentive
stock options may be granted only to employees, while consultant, employees,
officers and directors are eligible for the grant of nonstatutory options. The
Plan also provides for the grant of stock purchase rights, stock appreciation
rights and long term performance awards.

        The purpose of the plan is to provide an incentive to eligible
employees, consultants and officers whose present and potential contributions
are important to the continued success of the company, to afford those
individuals the opportunity to acquire a proprietary interest in the Company and
to enable the Company to enlist and retain in its employment qualified personnel
for the successful conduct of its business.

        The total number of shares of Common Stock of the Company reserved and
available for distribution under the Plan is 2,500,000 shares. Pursuant to the
Plan, the administrators of the Plan shall be either the Board of Directors or
one or more committees designated by the Board of Directors to administer the
Plan. Subject to the express terms of the Plan, the administrators have full
power to select, from among the officers, employees and consultants of the
Company eligible for award rights, and options, the individuals to whom awards,
rights or options will be granted, and to determine the specific terms of each
award or grant.

        The maximum term of a stock option under the Plan is ten years, but if
the optionee at the time of the grant has voting power over more than 10% of the
Company's outstanding capital stock, the terms is five years. The exercise price
of incentive stock options granted under the Plan must be at least equal to the
fair market value of such shares on the date of the grant. The exercise price of
nonstatutory stock options granted under the Plan is determined by the
administrators. Option may be exercisable in installments, and the
exercisability of options may be accelerated by the administrators.

        Options and rights granted pursuant to the Plan are nontransferable by
their participants, other than by will or by the laws of descent or
distribution, and may be exercised during the lifetime of the participant only
by the participant. Appropriate transfer restrictions shall apply to any such
stock awards.

        In the event of any change in capitalization in the company that results
in an increase or decrease in the number of outstanding shares without receipt
of consideration by the Company, an appropriate adjustment shall be made in the
number of shares which have been reserved for issuance under the Plan and the
price per share or number of shares covered by each outstanding option or right.

        The Plan may be amended by the Board at any time. However, stockholder
approval will be required to increase the number of shares reserved for issuance
under the Plan or where an amendment to the Plan would materially increase the
benefits accruing to participants under the Plan or materially modify the
requirements as to eligibility for participation in the Plan.




                                       13

<PAGE>   14
Defined Benefit and Actuarial Plans

        The Company has not supplied Defined Benefits, or similar Pension,
Benefit or Actuarial Plan Benefits to its Executive Officers.

Compensation of Directors

        Mr. Ekbom became a full time employee in April 1995, prior to that he
received compensation as a board member. Mr. Schlatter became a full time
employee in August 1994 and prior to that received compensation as a board
member. Mr. Larsen became a full time consultant and prior to that time received
compensation as a board member and part time consultant. Dr. Clark has been a
full time employee since he joined the Company 1991 and has not received board
member fees.

EMPLOYMENT CONTRACTS

        On April 1, 1995 the Board of Directors approved a three year employment
contract with Roger A. Ekbom, Chairman with an automatic renewal for one year
annually. The employment contract specifies a base annual salary of $100,000, an
automobile allowance, Medical and Dental coverage, $200,000 life insurance
payable to the corporation and participation in the 1995 Stock Plan with the
right to have an option for 100,000 shares to be granted annually. The contract
covers the duties and responsibilities as chief Executive officer for the
corporation. As of August 1, 1996 Mr. Ekbom agreed to a 75% reduction in
compensation for the balance of the fiscal year.

        On April 1, 1995 the Board of Directors approved an extension of the
employment contract of Gerald D. Schlatter to a total of three years with an
automatic one year extension annually. The contract added a $200,000 life
insurance policy payable to the corporation and participation in the 1995 Stock
Plan with the right to have an option for 100,000 shares to be granted annually.
The contract covers the duties and responsibilities as chief operating officer
for the corporation. As of August 1, 1996 Mr. Schlatter agreed to a 25%
reduction in compensation for the balance of the fiscal year.

        On April 1, 1995 the Board of Directors approved a three year consulting
contract with Robert J. Larsen with an annual one year automatic extension. The
contract specifies an annual consulting fee of $100,000 and includes a $200,000
life insurance payable to the corporation on the life of Robert Larsen and
participation in the 1995 Stock Plan with the right to have an option for
100,000 shares to be granted annually. The contract included the duties and
responsibilities of Robert Larsen as Chief Financial officer for the
corporation. On August 1, 1996 Mr. Larsen agreed to a 50% reduction in
compensation for the balance of the fiscal year.

        On October 1, 1991, Dr. Leland C. Clark, Jr., signed a five year
contract with the Company as Research and Development Director. That contract
has been extended on a month to month basis since October 1, 1996. The annual
salary is $120,000. On August 1, 1996 Dr. Clark agreed to a 25% reduction in
compensation for the fiscal year.

REPRICING OF OPTIONS

        During the last fiscal year the Company has not adjusted or amended the
exercise price of stock options.



                                       14

<PAGE>   15
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE, INTERLOCKS
AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS

        The Company does not presently have a Compensation Committee of the
Board of Directors, or other Board Committees performing equivalent functions,
and did not at any time during the last four years. The entire Board of
Directors presently performs these functions. All of the Executive officers are
members of the Company's four person Board of Directors.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following tables sets forth the stock ownership of all persons who,
to the registrants knowledge, own of record and beneficially five (5%) per cent
or more of its outstanding Common Stock, and for the officers and directors as a
group.

        MANAGEMENT OWNERS

<TABLE>
<CAPTION>
        Title of             Name of                      Amount & Nature        Percent
        Class                Beneficial                    of Beneficial          of
                             Owner                          Ownership            Class
        <S>                  <C>                           <C>                   <C>
        Common Stock         Roger A. Ekbom                  1,891,670             4.4%

        Common Stock         Gerald D. Schlatter             1,234,660             2.9%

        Common Stock         Leland C. Clark, Jr.(l)         4,852,900            11.3%

        Common Stock         Robert J. Larsen (2)             1,542,445            3.6%

        All Directors and Officers as a group (4 persons)     5,730,330           18.5%
</TABLE>

        (1) Leland C. Clark, Jr., owns 4,283,485 shares, Eleanor W. Clark owns
569,415 for a total of 4,852,900.

        (2) Robert J. Larsen owns 1,542,445 beneficial by virtue of his control
of Peso, Inc. and Jada, Inc.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Roger A. Ekbom, a director and Chief Executive officer, loaned the
Company $3,560 as of April 30, 1997. Gerald D. Schlatter, a director and Chief
Operating Officer, loaned the Company $8,365 as of April 30, 1997. Leland C.
Clark, Jr. , a director and Vice President of Research and Development, loaned
the Company $62,887 as of April 30, 1997. Robert J. Larsen, a director and Chief
Financial officer, loaned the Company $1,167 as of April 30, 1997. These loans
totaling $75,979 were made to enable the Company to continue its business
operations, pending receipt of additional funding.




                                       15

<PAGE>   16
ITEM        14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
            ON FORM S-K 
            Response to Item 8.
A.          Documents Filed as a Part of This Report:
(1)              FINANCIAL STATEMENTS

(a)                Independent Auditors Report.

(b)                Balance Sheets as of April 30, 1997 & 1996.

(c)                Statements of operations for each of the three years
                               in the period ended April 30, 1997.

(d)                Statements of Stockholders, Equity for each of the three
                   years in the period ended April 30, 1997.

(e)                Statements of Cash Flows for the three years in the period
                   ended April 30, 1997.

(f)                Notes to the Financial Statements.

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
   Exhibits Required by                                     Exhibits to       Exhibits To
   Item 601 of Regulation S-K                                This Year       Prior Reports
       <S>                                                                   <C>
       3 (a) Registrants Amended Articles of Incorporation                         A-1

       3 (b) Specimen Form of Common Stock                                          x
                   Certificate

       4 (a)  Specimen three year Warrants to Purchase
                   Stock dated July 24, 1992 with amendments                        x

       4 (b)  Specimen three years Warrants to Purchase
                   Stock dated September 30, 1992 with amendments                   x

       4 (c)  Specimen three year Warrants to Purchase
                   Stock dated November 20, 1992 with amendments                    x

       4 (d)  Warrant to Purchase Stock issued February 28,1994 to American 
              Heritage Fund.
       4 (e)  Warrant to Purchase Stock issued July 24, 1992
                   to Cato Portfolio AG                                             x

       4 (f)         Specimen two year Warrant to Purchase Stock dated
                     September 30, 1992 and November 20, 1992                       x

       4 (g)         Warrant to Purchase Stock issued April 29, 1994 to Cato 
                     Portfolio AG                                                   x
</TABLE>

                                       16

<PAGE>   17
<TABLE>
       <S>                                                                           <C>

       (k)            Warrant to Purchase Stock issued August 19, 1993                x
                      and September 9, 1993 to Cato Portfolio

       (1)            Specimen two year Warrants to Purchase Stock issued
                      on various dates from January 21, 1993 to
                      February 23, 1994                                              x

       10(a)          Agreement between the Registrant and Leland C. Clark,
                      Jr., Ph.D. dated October 1, 1991 with amendments, Re:
                      Assignment of Intellectual Property and Trade Secrets          x

       10(b)          Agreement between the Registrant and
                      Keith R. Watson, Ph.D., Re: Assignment of Invention            x

       10(c)          Agreement between the Registrant and Children's
                      Hospital Medical Center dated, July 6, 1992                    x

       10(d)          Agreement between the Registrant and Children's
                      Hospital Medical Center dated, July 6, 1993                    x

       10(e)          Agreement between the Registrant and Children's
                      Hospital Medical Center dated, July 6, 1993                    x

       10(f)          Agreement between the Registrant and Roger R. Ekbom
                      dated, April 1, 1995                                           x

       10(g)          Agreement between the Registrant and Gerald D.
                      Schlatter dated, July 11, 1994 with Amendments                 x

       10(h)            Agreement between the Registrant and Robert J.
                        Larsen dated, April 1, 1995                                  x

       10(i)            Agreement between the Registrant and L.G. Kurtz &
                        Associates dated, July 22, 1994                              x

       10(j)            Agreement between the Registrant and Broadgate
                        Consultant, Inc., dated, July 29, 1994                       x

       10(k)            Agreement between the Registrant and San Diego
                        Contract Research Associates, Inc. dated November 21, 
                        1995                                                         x

       10(l)            Agreement between the Registrant and Glen Wegner, M.D.,
                        J.D. dated, April 27, 1995                                   x

       10(m)            Employee Stock Plan dated, April 28, 1995                    x

       10(n)            Indemnification Agreement between the Registrant and
                        members of the Board of Directors dated, April 26, 1995      x

       10(o)            Agreement between the Registrant and Air Products
                        & Chemical, Inc., dated January 30, 1995.                    x
</TABLE>


                                       17

<PAGE>   18
Pursuant to the requirements of Section 13 of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.


                       SYNTHETIC BLOOD INTERNATIONAL, INC.




                                      Roger A. Ekbom, Chairman & CEO

                                         By: /S/ ROGER A. EKBOM


                           Robert J. Larsen, Secretary & Chief Financial Officer

                                         BY: /S/ ROBERT J. LARSEN


Dated: 7/22/97

Pursuant to the requirements of Instruction D to Form 10-K under the Securities
and Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated. The following represent at least a majority of the Board of Directors
of the Registrant.


Date                     Name & Title

                         Roger A. Ekbom
                         Chairman of the
7/22/97                  Board of Directors 
                         By: /S/ ROGER A. EKBOM


                         Gerald D. Schlatter
7/22/97                  President & Director
                         By: /S/ GERALD SCHLATTER


                         Leland C. Clark, Jr.
                         Vice President &
                         Director


                         Robert J. Larsen
                         Director & Secretary
7 / 22 / 97              Treasurer
                         By: /S/ ROBERT LARSEN


                                       18

<PAGE>   19
INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of
  Synthetic Blood International, Inc.:


We have audited the accompanying balance sheets of Synthetic Blood
International, Inc. (the Company) as of April 30, 1997 and 1996 and the related
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended April 30, 1997 and for the period from May 26,
1967 (date of incorporation) to April 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audits. The financial
statements for the period May 26, 1967 through April 30, 1994 were audited by
other auditors and reflected an accumulated net loss of $2,148,706. The other
auditors' report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such prior period, is based solely on the
report of such other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of Synthetic Blood International, Inc. as of April 30, 1997 and 1996
and the results of its operations and its cash flows for the years then ended,
and for the period from May 26, 1967 (date of incorporation) to April 30, 1997
in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing certain medical products. As discussed in Note
1 to the financial statements, the Company's accumulated losses from operations,
negative working capital and operating cash flows, its necessity to obtain
additional financing to fund operations until the necessary regulatory approvals
are obtained, if ever, and its ability to ultimately attain successful
operations, raise





                                      -19-
<PAGE>   20
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.




Costa Mesa, California
June 18, 1997




                                      -20-
<PAGE>   21
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS
AS OF APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                       1997            1996
                                       ----            ----
<S>                                 <C>              <C>      
ASSETS

CURRENT ASSETS:
Cash and cash equivalents           $  53,857        $  76,312
Prepaid expenses:
  Insurance                            11,925           20,686
  Other                                 5,500            9,126
                                    ---------        ---------

                                       17,425           29,812
                                    ---------        ---------

    Total current assets               71,282          106,124

PROPERTY AND EQUIPMENT:
Laboratory equipment                  235,133          235,329
Furniture and fixtures                 68,385           70,064
                                    ---------        ---------

                                      303,518          305,393
Less accumulated depreciation        (166,085)        (103,226)
                                    ---------        ---------

  Property and equipment, net         137,433          202,167

PATENTS, net (Note 2)                 109,448           85,648
                                    ---------        ---------

                                    $ 318,163        $ 393,939
                                    =========        =========
</TABLE>


See independent auditors' report and notes to financial statements.



                                      -21-
<PAGE>   22
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)



BALANCE SHEETS
AS OF APRIL 30, 1997 AND 1996 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            1997              1996
                                                                            ----              ----
<S>                                                                     <C>                <C>        
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Current portion of capital lease obligation (Note 3)                    $    16,573        $    17,722
Accounts payable                                                            323,401            277,340
Accrued payroll                                                              50,722            343,641
Other accrued liabilities                                                   134,000             89,565
Notes payable to stockholders (Note 4)                                       75,979            246,701
                                                                        -----------        -----------

    Total current liabilities                                               600,675            974,969

CAPITAL LEASE OBLIGATION, net of current portion (Note 3)                                       16,573

COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)

STOCKHOLDERS' DEFICIT (Notes 5 and 6):
Common stock, par value $0.01 per share; authorized 100,000,000
  shares; 42,829,477 and 31,030,382 shares issued and outstanding
  at April 30, 1997 and 1996, respectively                                  428,295            310,304
Additional paid-in capital                                                7,576,325          5,468,849
Deficit accumulated during the development stage                         (8,287,132)        (6,376,756)
                                                                        -----------        -----------

      Total stockholders' deficit                                          (282,512)          (597,603)
                                                                        -----------        -----------

                                                                        $   318,163        $   393,939
                                                                        ===========        ===========
</TABLE>




See independent auditors' report and notes to financial statements.



                                      -22-
<PAGE>   23
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                 ACCUMULATED
                                  DURING THE
                                 DEVELOPMENT
                                    STAGE               1997                 1996                1995

<S>                              <C>                 <C>                 <C>                 <C>        
EXPENSES:
Research and development         $  2,792,433        $    460,978        $    924,093        $   896,534
General and administrative          5,441,328           1,437,353           1,422,809          1,017,415
Interest                              101,672              12,959               5,241              3,055
                                 ------------        ------------        ------------        -----------

    Total expenses                  8,335,433           1,911,290           2,352,143          1,917,004

OTHER INCOME                          (48,301)               (914)             (5,916)           (35,181)
                                 ------------        ------------        ------------        -----------

NET LOSS                         $ (8,287,132)       $ (1,910,376)       $ (2,346,227)       $(1,881,823)
                                 ============        ============        ============        ===========

NET LOSS PER SHARE                                   $      (0.05)       $      (0.08)       $     (0.07)
                                                     ============        ============        ===========

WEIGHTED AVERAGE NUMBER
   OF COMMON SHARES
   OUTSTANDING                                         36,053,557          28,894,248         26,333,838
                                                     ============        ============        ===========
</TABLE>




See independent auditors' report and notes to financial statements.



                                      -23-
<PAGE>   24
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                            DEFICIT
                                                                                           ACCUMULATED          TOTAL
                                                                          ADDITIONAL       DURING THE        STOCKHOLDERS'
                                         NUMBER OF          COMMON         PAID-IN        DEVELOPMENT         EQUITY
                                          SHARES            STOCK          CAPITAL           STAGE             (DEFICIT)

<S>                                    <C>                  <C>            <C>             <C>               <C>      
BALANCES, May 26, 1967                       -           $     -           $    -           $    -            $   -

Issuance of common stock               23,541,043           235,410        2,718,686                         2,954,096

Conversion of convertible
  debentures into common
  stock                                   870,199             8,702          771,298                           780,000

Net losses                                                                                 (2,148,706)      (2,148,706)
                                       ----------           -------        ---------       ----------        ---------

BALANCES, May 1, 1994                  24,411,242           244,112        3,489,984       (2,148,706)       1,585,390

Issuance of common stock,
  net of issuance costs of
  $210,000 (Note 5)                     2,366,667            23,667        1,061,333                         1,085,000

Issuance of common stock to
  employees and compensatory
  options (Note 5)                        218,800             2,188           81,312                            83,500

Common stock issued upon
  conversion of notes payable
  (Note 5)                                500,000             5,000          120,000                           125,000

Exercise of warrants (Note 6)              13,750               137            1,238                             1,375

Contribution of capital through
  services rendered (Note 5)                                                  30,000                            30,000

Net loss                                                                                   (1,881,823)      (1,881,823)
                                       ----------           -------        ---------       ----------        ---------

BALANCES, April 30, 1995               27,510,459           275,104        4,783,867       (4,030,529)       1,028,442
</TABLE>



See independent auditors' report and notes to financial statements.



                                      -24-
<PAGE>   25
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                            DEFICIT
                                                                                          ACCUMULATED          TOTAL
                                                                           ADDITIONAL     DURING THE        STOCKHOLDERS'
                                       NUMBER OF          COMMON            PAID-IN       DEVELOPMENT         EQUITY
                                        SHARES            STOCK             CAPITAL          STAGE             (DEFICIT)

<S>                                  <C>               <C>                <C>              <C>                <C>       
Issuance of common stock                358,333        $     3,583        $   71,417       $      -          $  75,000

Issuance of common stock
  in conjunction with funding
  agreements and services
  rendered (Note 5)                   1,444,090             14,441           317,291                           331,732

Issuance of common stock to
  officers (Note 5)                     117,500              1,176            16,574                            17,750

Common stock issued upon
  conversion of notes payable
  (Note 5)                              400,000              4,000            76,000                            80,000

Exercise of warrants (Note 6)         1,200,000             12,000           108,000                           120,000

Issuance of warrants (Note 6)                                                 60,000                            60,000

Contribution of capital from
  officer (Note 5)                                                            35,700                            35,700

Net loss                                                                                    (2,346,227)     (2,346,227)
                                     ----------        -----------        ----------       -----------      ---------- 

BALANCES, April 30, 1996             31,030,382            310,304         5,468,849        (6,376,756)       (597,603)

Issuance of common stock              4,000,000             40,000         1,100,000                         1,140,000

Common stock issued upon
  conversion of note payable
  (Note 5)                              133,500              1,335            18,165                            19,500

Common stock issued upon
  conversion of notes payable
  to officers (Note 5)                3,733,320             37,333           423,442                           460,775

Issuance of common stock in
  exchange for services
  rendered (Note 5)                   3,932,275             39,323           565,869                           605,192

Net loss                                                                                    (1,910,376)      (1,910,376)
                                     ----------        -----------        ----------       -----------        --------- 

BALANCES, April 30, 1997             42,829,477        $   428,295        $7,576,325       $(8,287,132)       $(282,512)
                                     ==========        ===========        ==========       ===========        ========= 
</TABLE>



See independent auditors' report and notes to financial statements.



                                      -25-
<PAGE>   26
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                    ACCUMULATED
                                                    DURING THE
                                                   DEVELOPMENT
                                                      STAGE             1997             1996              1995

<S>                                                <C>              <C>              <C>              <C>         
CASH FLOWS FROM OPERATING
  ACTIVITIES:
Net loss                                           $(8,287,132)     $(1,910,376)     $(2,346,227)     $(1,881,823)
Adjustments to reconcile net loss to net
  cash used in operating activities:
  Depreciation and amortization                        238,450           83,073           87,459           44,097
  Write-down of other assets                           126,800                                            126,800
  Issuance of compensatory stock options/
    warrants                                           118,500                            60,000           58,500
  Issuance of stock below fair market value            540,000          540,000
  Issuance of stock for services rendered              936,924          605,192          331,732
  Contribution of capital through services
    rendered                                            30,000                                             30,000
  Changes in operating assets and liabilities:
    Receivables from employees                                                                              7,178
    Prepaid expenses                                   (17,425)          12,387           60,282           36,090
    Accounts payable and accrued expenses              508,123         (202,423)         608,263         (194,016)
                                                   -----------      -----------      -----------      -----------

      Net cash used in operating activities         (5,805,760)        (872,147)      (1,198,491)      (1,773,174)

CASH FLOWS FROM INVESTING
  ACTIVITIES:
Purchase of property and equipment                    (270,640)          (2,128)         (33,699)        (136,686)
Proceeds from sale of property and equipment            15,457                            15,457
Purchase of other assets                              (304,610)         (40,011)         (35,866)         (14,209)
                                                   -----------      -----------      -----------      -----------

      Net cash used in investing activities           (559,793)         (42,139)         (54,108)        (150,895)
</TABLE>


See independent auditors' report and notes to financial statements.


                                      -26-
<PAGE>   27
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                     ACCUMULATED
                                                      DURING THE
                                                     DEVELOPMENT
                                                        STAGE          1997             1996            1995
<S>                                                 <C>              <C>            <C>              <C>        
CASH FLOWS FROM FINANCING
  ACTIVITIES:
Proceeds from issuance of notes payable
  to stockholder                                    $   836,254      $ 309,553      $   326,701      $     6,000
Repayments of notes payable to stockholder              (75,000)                                         (75,000)
Proceeds from issuance of convertible
  debentures                                            780,000
Payments on capital lease obligation                    (35,765)       (17,722)         (14,065)          (3,978)
Contribution of capital from stockholders                35,700                          35,700
Proceeds from issuance of common stock                4,878,221        600,000          212,750        1,111,375
                                                    -----------      ---------      -----------      -----------

      Net cash provided by financing activities       6,419,410        891,831          561,086        1,038,397
                                                    -----------      ---------      -----------      -----------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                   53,857        (22,455)        (691,513)        (885,672)

CASH AND CASH EQUIVALENTS,
  beginning of period                                                   76,312          767,825        1,653,497
                                                    -----------      ---------      -----------      -----------

CASH AND CASH EQUIVALENTS,
  end of period                                     $    53,857      $  53,857      $    76,312      $   767,825
                                                    ===========      =========      ===========      ===========

CASH PAID FOR:
Interest                                            $    88,446      $   3,339      $     5,241      $     1,601
                                                    ===========      =========      ===========      ===========
Taxes                                               $     4,800      $     800      $       800      $       800
                                                    ===========      =========      ===========      ===========
</TABLE>


SUPPLEMENTAL INFORMATION -
   For information relating to conversion of notes payable into common stock and
   other noncash transactions see Notes 3 and 5.



See independent auditors' report and notes to financial statements.

                                      -27-
<PAGE>   28
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997
--------------------------------------------------------------------------------

1.      GENERAL

        The Company was incorporated on May 26, 1967 and was inactive through
        September 1990 when it began conducting operations for the purpose of
        developing a synthetic blood emulsion to act as a human blood
        substitute, and a method of using a perfluorocarbon compound to
        facilitate oxygen exchange for individuals with respiratory distress
        syndrome. Shortly after commencing these operations the Company changed
        its name to Synthetic Blood International, Inc. The Company is also
        developing an implantable, continuous reading glucose biosensor to be
        used primarily by individuals with diabetes. All of the Company's
        products are currently in the pre-clinical trial stage. This stage
        requires a sufficient level of animal testing to be performed in order
        to file certain applications with the United States Food and Drug
        Administration (FDA) which is necessary to obtain FDA approval to
        proceed with human testing and ultimately approval to market the
        products. No assurances can be given that such approvals, once applied
        for, will be granted.

        Going Concern - The accompanying financial statements have been prepared
        on a going concern basis, which contemplates the realization of assets
        and the satisfaction of liabilities in the normal course of business.
        The Company is in the development stage and, at April 30, 1997, has
        accumulated losses from operations amounting to $8,287,132, a working
        capital deficit of $529,393 and incurred negative cash flow from
        operations of $872,147 in fiscal 1997. As mentioned in the preceding
        paragraph, the Company is in the pre-clinical trial stage of its
        products. These products must undergo further development and testing
        prior to submission to the FDA for approval to market the products. The
        additional development and testing will require significant additional
        financing. Management intends to seek such additional financing through
        future private placement offerings and/or joint ventures. The Company's
        continuation as a going concern is dependent on its ability to obtain
        additional financing, and ultimately to attain successful operations.
        However, no assurance can be given at this time as to whether the
        Company will achieve these conditions or that FDA approval will be
        granted, once applied for. These factors, among others, raise
        substantial doubt about the Company's ability to continue as a going
        concern. The financial statements do not include any adjustments
        relating to the recoverability and classification of recorded asset
        amounts or the amounts and classification of liabilities that might be
        necessary should the Company be unable to continue as a going concern
        for a reasonable period of time.


2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Development Stage - Because the Company has not commenced principal
        operations, it is considered a "Development Stage Enterprise" as defined
        by Statement of Financial Accounting Standards (SFAS) No. 7, Accounting
        and Reporting by Development Stage Enterprises.



                                      -28-
<PAGE>   29
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        Cash and Cash Equivalents - The Company considers highly liquid
        investments with original maturities of three months or less to be cash
        equivalents.

        Property and Equipment - Property and equipment are recorded at cost.
        Depreciation and amortization are computed using the straight-line
        method over the shorter of the estimated useful lives of the related
        assets, ranging from three to ten years, or the lease term, if
        applicable.

        Patents - Patent costs are being amortized over the lesser of the
        remaining life of the patent or the estimated useful life of the related
        product, ranging from eight to ten years. Patent costs totaled $149,801
        and $134,790, net of accumulated amortization of $40,353 and $49,142, at
        April 30, 1997 and 1996, respectively. The Company evaluates
        recoverability of patents on at least an annual basis by comparing the
        estimated resale value of the patents to the remaining carrying values.
        An adjustment to the carrying value of the patent rights would be made
        if the estimated resale value of the patents is determined to be
        insufficient to recover such value.

        Pricing of Common Stock and Options to Purchase Common Stock - The
        Company's Board of Directors determines the issuance price of its common
        stock and the exercise price of options to purchase common stock, based
        on a good faith estimate of fair market value, which is derived from
        recent issuances of common stock to unrelated parties and/or from common
        stock market quotations, after giving effect to the restricted nature of
        the stock issued. In the event that stock is issued at a price below
        fair market value, an expense is recorded for the difference between
        fair market value and the issuance price and is included in general and
        administrative expenses.

        Net Loss per Common Share - Net loss per common share is calculated
        using the weighted average number of common shares outstanding during
        the period. Common share equivalents have not been included in the per
        share computations because their effect is antidilutive.

        Income Taxes - The Company accounts for its income taxes in accordance
        with the standards specified in SFAS No. 109, Accounting for Income
        Taxes.

        Reclassifications - Certain amounts as previously reported have been
        reclassified to conform to the 1997 presentation.

        Use of Estimates - The preparation of financial statements in conformity
        with generally accepted accounting principles requires management to
        make estimates and assumptions that affect the reported amounts of
        assets and liabilities at the date of the financial statements and the
        reported amounts of other income and expenses during the reporting
        periods. Actual results could differ from those estimates.




                                      -29-
<PAGE>   30
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        Fair Value of Financial Instruments - The Company's balance sheet
        includes the following financial instruments: cash and cash equivalents,
        accounts payable, accrued expenses, capital lease obligation and notes
        payable to stockholders. The Company considers the carrying amount in
        the financial statements to approximate fair value for these financial
        instruments because of the relatively short period of time between
        origination of the instruments and their expected realization.

        Stock-Based Compensation - The Company accounts for stock-based awards
        to employees using the intrinsic value method in accordance with
        Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
        Issued to Employees. (Note 6)

        New Accounting Pronouncement - During 1997, the FASB issued SFAS No.
        128, Earnings per Share. SFAS No. 128 requires the Company to disclose a
        basic and diluted earnings per share calculation. Basic earnings per
        share (EPS) excludes common stock equivalents from the EPS calculation,
        while diluted EPS is calculated consistent with the Company's primary
        earnings per share calculation. The Company will adopt the provisions of
        SFAS No. 128 with the fiscal 1998 financial statements. Basic and
        diluted EPS, as computed under SFAS No. 128, would not have been
        materially different from EPS determined in accordance with APB Opinion
        No. 15 for the periods presented.


3.      COMMITMENTS AND CONTINGENCIES

        Leases - During fiscal 1995, the Company entered into capital lease
        agreements for certain computer equipment which expires in fiscal 1998.
        At April 30, 1997, the capitalized cost related to these leases amount
        to $52,388 and the related accumulated amortization amounted to $39,254.
        As of April 30, 1997, the future minimum lease payments amounted to
        $17,551, of which $978 represents interest.

        Employment Contracts - The Company has employment agreements with
        certain officers and a key employee with aggregate future commitments of
        $240,000 in 1998.

        Litigation - The Company is subject to litigation in the normal course
        of business, none of which management believes will have a material
        adverse effect on the Company's financial statements as of April 30,
        1997 except as follows:

        The Company has two legal matters pending at April 30, 1997. These legal
        actions were filed by former employees alleging unfair treatment during
        a temporary layoff in December 1995. These cases are presently in
        pretrial discovery. Company management's recent communications with
        legal counsel



                                      -30-
<PAGE>   31
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------


        have indicated that the Company's exposure related to these legal
        actions could amount to $124,000. Thus, while the outcome of such
        litigation is uncertain, the Company has provided an accrual for such
        loss contingency using the best available estimate of $124,000.


4.      NOTES PAYABLE TO STOCKHOLDERS

        During 1997, certain stockholders loaned the Company $309,553 to fund
        operations. As of April 30, 1997, notes payable to stockholders amounted
        to $79,979. Such loans are due on demand and are noninterest-bearing.


5.      STOCKHOLDERS' EQUITY

        At April 30, 1994, the Company had a subscription agreement with an
        unrelated entity providing for future purchases of up to 1,666,667
        shares of the Company's common stock at $.60 per share, which was
        fulfilled during fiscal 1995. In conjunction with this agreement, the
        Company incurred offering costs of $210,000, of which $150,000 was paid
        in cash and $60,000 was paid through the issuance of 100,000 shares of
        common stock. Also, the Company issued a warrant providing for the
        purchase of up to 500,000 shares of its common stock at $.60 per share,
        which approximated the fair market value of the warrant. The warrants
        expire in April 1998.

        During fiscal 1995, the Company converted outstanding notes payable to a
        stockholder and officer aggregating $125,000 into 500,000 shares of the
        Company's common stock, pursuant to a conversion provision granted by
        the Company. In conjunction with the terms of the original agreement
        which was entered into during fiscal 1994, the Company granted the
        holder warrants to purchase 110,250 shares of common stock at an
        exercise price of $.10 per share. At the date of the agreement, the
        exercise price of the warrants was considered to approximate the fair
        market value of the warrants. In addition, the Company issued 110,800
        shares of the Company's common stock as additional consideration for the
        note. An amount representing the fair market value of the Company's
        common stock at the date of the agreement was recognized as expense
        related to this issuance.

        During fiscal 1995, an entity in which an officer of the Company has a
        controlling interest, transferred an aggregate of 120,000 shares of the
        Company's common stock to a stockholder and an employee for certain
        loans and services, respectively, provided to the Company. Accordingly,
        an amount which represents the fair market value of the Company's common
        stock at the date of the related transfers or issuances has been
        recognized in the accompanying financial statements as an expense.



                                      -31-
<PAGE>   32
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



        During fiscal 1995, the Company issued 100,000 shares of common stock to
        an employee for $25,000 in cash, which represented the fair market value
        at the date of issuance. In addition, in exchange for various services
        performed, the Company issued certain officers 8,000 shares of the
        Company's common stock.

        During fiscal 1996, the Company issued 1,200,000 shares of its common
        stock in conjunction with a standby funding agreement with a
        stockholder, which allowed the Company to borrow up to $450,000 from
        this stockholder during the period from August 1995 through October
        1995. As a result of this agreement, the Company recognized an expense
        of $240,000 which represented the fair market value of the shares at the
        date of the agreement.

        During fiscal 1996, the Company issued 117,500 shares of common stock to
        officers. In addition, during 1996, the officers exercised warrants
        granted during 1994 to purchase 91,250 shares of common stock. The
        exercise price of the warrants of $.10 per share approximated the fair
        market value of the warrants on the date of grant. The remaining shares
        were purchased for $8,625 in cash, which represented the fair market
        value at the date of issuance.

        During fiscal 1996, the Company converted an outstanding note payable to
        a stockholder of $80,000 into 400,000 shares of the Company's common
        stock, pursuant to a conversion option granted by the Company.

        During fiscal 1996, an officer of the Company contributed $35,700 in
cash to fund operations.

        During fiscal 1996, the Company expensed $45,000, which was paid to a
        stockholder as an inducement to retain shares of the Company's common
        stock.

        In July 1997, the Company converted an outstanding note payable to a
        stockholder in the amount of $19,500 into 133,500 shares of the
        Company's common stock. As a result of this transaction, the Company
        recognized expense of $14,685, representing the difference between the
        fair market value and the issuing value of the common stock.

        During fiscal 1997, the Company converted outstanding notes payable to
        officers totaling $460,775 into 3,733,320 shares of the Company's common
        stock. In addition, the Company issued 3,330,175 shares of the Company's
        common stock in exchange for services rendered by officers, which were
        valued at an average per share price of $.15.

        During fiscal 1997, the Company issued 602,100 shares of the Company's
        common stock in exchange for services rendered by stockholders, which
        were valued at an average per share price of $.18.



                                      -32-
<PAGE>   33
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



6.      STOCK OPTIONS AND WARRANTS

        In April 1995, the Company adopted a stock option plan providing for the
        granting of options to officers, directors, consultants and key
        employees to purchase up to 2,500,000 shares of the Company's common
        stock at prices not less than the fair market value of the stock at the
        date of grant. The option expiration dates are determined at the date of
        grant, but may not exceed ten years. In conjunction with this agreement
        in fiscal 1995, the Company granted an employee an option to purchase up
        to 100,000 shares of the Company's common stock at $.25 per share. The
        option expires in March 1999. In fiscal 1996, no new options were
        granted, however, the Company's Board of Directors did commit to grant
        three officers 100,000 options each at a future date. The option price
        will be determined at the date of grant. In fiscal 1997, no new options
        were granted.
        During fiscal 1995, 1996 and 1997, no options were exercised.

        In connection with various agreements for the sale of the Company's
        common stock (Note 5) and in lieu of payment for services rendered, the
        Company issued warrants to purchase shares of its common stock at prices
        ranging from $0.10 to $3.00 per share. During fiscal 1996, the Company
        granted warrants to nonemployees to purchase 1,200,000 shares of common
        stock at $.10 per share. As the exercise price was less than the fair
        market value of the stock on the grant date, an amount representing the
        difference between exercise price and fair market value was recognized
        as expense during fiscal 1996. All warrants granted during fiscal 1996
        were exercised in April 1996. Remaining warrants outstanding at April
        30, 1997 provide for the purchase of common shares at $.60 to $1.00 per
        share and expire in April 1999. Warrant activity for each of the three
        years ended April 30, 1997 is as follows:


<TABLE>
<CAPTION>
                      1997                                             1996                                               1995
              -------------------------------------   ---------------------------------------  ------------------------------------
                                           WEIGHTED                                  WEIGHTED                              WEIGHTED
                             EXERCISE      AVERAGE                    EXERCISE       AVERAGE                  EXERCISE     AVERAGE
                NUMBER        PRICE        EXERCISE     NUMBER          PRICE        EXERCISE    NUMBER        PRICE       EXERCISE
              OF SHARES     PER SHARE       PRICE     OF SHARES       PER SHARE       PRICE    OF SHARES     PER SHARE      PRICE

<S>             <C>       <C>              <C>        <C>            <C>              <C>       <C>       <C>               <C>    
BALANCE,
  beginning
  of year       600,000   ($.60 - $1.00)   $  0.67     2,189,973    ($.10 - $3.00)   $  1.31   2,218,584   ($.10 - $3.00)  $  1.29

Granted                                                1,200,000    ($.10)           $  0.10     101,500   ($.10 - $1.00)  $  0.99
Expired                                               (1,498,723)   ($.10 - $3.00)   $  1.64    (116,361)  ($.10 - $1.12)  $  0.86
Exercised                                             (1,291,250)   ($.10)           $  0.10     (13,750)  ($.10)          $  0.10
                                                      ----------                                --------

BALANCE,
  end of year   600,000   ($.60 - $1.00)   $  0.67       600,000    ($.60 - $1.00)   $  0.67   2,189,973 ($.10 - $3.00)    $  1.31
                =======                               ==========                               =========
</TABLE>




                                      -33-
<PAGE>   34
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



        The Company applies APB Opinion No. 25, Accounting for Stock Issued to
        Employees, and related interpretations to account for stock option and
        warrants granted to employees. Had compensation cost for the stock
        option been determined based on the fair value at the grant date
        consistent with the method of SFAS No. 123, Accounting for Stock-Based
        Compensation, the Company's net loss would not have been materially
        different from the net loss recorded under APB Opinion No. 25.

        The Company did not grant any options or warrants during fiscal 1997 and
        all previous issuances were fully vested. Therefore, there is no
        difference between the reported net loss for fiscal 1997 as accounted
        for under the provisions of APB Opinion No. 25 and SFAS No. 123.

        The fair value for these options and warrants was estimated at the date
        of grant using a Black-Scholes option pricing model with the following
        assumptions for fiscal 1996: risk-free interest rate of 6%, no dividend
        yield, volatility factor of 117%, and a life of the options and warrants
        of one month. The assumptions were the same for fiscal 1995, with the
        exception of the life of the options and warrants, which was estimated
        to be 48 months.

        The Black-Scholes option valuation model was developed for use in
        estimating the fair value of traded options and warrants which have no
        vesting restrictions and are fully transferable. In addition, option
        valuation models require the input of highly subjective assumptions
        including the expected stock price volatility. Because the Company's
        employee stock options and warrants have characteristics significantly
        different from those of traded options, and because changes in the
        subjective input assumptions can materially affect the fair value
        estimate, in management's opinion, the existing models do not
        necessarily provide a reliable single measure of the fair value of its
        employee stock options.


7.      INCOME TAXES

        SFAS No. 109, Accounting for Income Taxes, requires the recognition of
        deferred tax liabilities and assets for the future consequences of
        events that have been recognized in the Company's financial statements
        or tax returns. In the event the future consequences of differences
        between financial reporting bases and tax bases of the Company's assets
        and liabilities result in a deferred tax asset, SFAS No. 109 requires an
        evaluation of the probability of being able to realize the future
        benefits indicated by such asset. A valuation allowance is provided when
        it is more likely than not that some portion or all of the deferred tax
        asset will not be realized.




                                      -34-
<PAGE>   35
SYNTHETIC BLOOD INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1997 (CONTINUED)
--------------------------------------------------------------------------------



        As of April 30, 1997 and 1996, the Company had net deferred tax assets
        of approximately $2,817,625 and $2,171,000, respectively, all of which
        has been offset by a valuation allowance. These deferred tax assets are
        comprised of net operating loss and research and development credit
        carryforwards which expire through 2012.


8.      RELATED PARTIES

        During fiscal 1997, 1996 and 1995, the Company recorded expenses of
        approximately $63,000, $100,000 and $72,000, respectively, for services
        provided to the Company which were provided by a company in which an
        officer of the Company has a controlling interest.

        Included in accounts payable at April 30, 1997 and 1996 are payables to
        officers of $52,038 and $53,784, respectively.



                                      -35-